SK Telecom's First-Quarter Earnings Tops Forecasts

SK Telecom, South Korea's top mobile carrier, reported better-than-expected first quarter profit as its marketing costs grew by less than analysts had forecast, despite toughercompetition.

The sector outlook hinges on whether operators can contain a costly war to win users for their high-speed mobile services, as revenue growth from those services would remain slow for now.

SK and second-ranked KTF last month launched full nationwide HSDPA (high speed download packet access) services, hoping to grow sales of profitable Internet and multimedia content such as video calls and music downloads.

"The results are encouraging," said Chung Kyun-sik, chief investment officer at Uris Investment Advisors. "HSDPA services are unlikely to give a significant boost to top-line growth, so marketing costs will again determine further earnings."

SK, which controls 50.4% of South Korea's mobile phone market, posted 662 billion won ($714.5 million) in January-March operating profit, down nearly 1% from 667.9 billion won a year earlier, but ahead of analysts' forecasts for 601 billion won.

Net profit rose 17.5% to 396.3 billion won from 337.2 billion won a year earlier, when profits were hit by one-off costs related to changes in SK's retirement scheme. It also beat a consensus forecast for 352.5 billion won net profit.

Sales of 2.71 trillion won were slightly above a forecast 2.68 trillion won and up from 2.54 trillion won a year earlier.

SK boosted its quarterly marketing spend by a third to 587 billion won to keep its lead against KTF's aggressive push with the HSDPA service, but the costs were less than the 620 billion won analysts had expected, and were down 8% from the fourth quarter.

Its margin on earnings before interest, tax, depreciation and amortization (EBITDA) rose to 38.9% from 37.3% in the fourth quarter.

Competition With KTF

KTF on Wednesday posted a bigger-than-expected 39% drop in first-quarter net profit to 77.1 billion won, after spending heavily to launch and market its HSDPA service.

To defend its lead, SK focused on subscriber growth. Its subscriber base at end-March was 20.7 million, 5% higher than a year ago. Average revenue per user grew 2%.

"The problem is that competition is going to increase with KTF over market share for HSDPA," said Kim Yung-min, a fund manager at SH Asset Management. "Second-quarter earnings are also not going to be good."

Some analysts said a new deregulation policy announced last month could trigger even more competition in the sector. The new rules allow companies to introduce bundled products and lift some of the limits imposed on handset subsidies, which may pressure earnings even more.